Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Is Natural Gas Price Ready For An April Rally? - 8th Apr 20
Market Predictions And The Business Implications - 8th Apr 20
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Increased Fiscal Spending Could Spell Debt Trouble for 2017

Interest-Rates / US Debt Jan 04, 2017 - 11:58 AM GMT

By: John_Mauldin

Interest-Rates

Over the past 30 years, America’s economic growth and boom-bust market cycles have been fueled with abundant sources of cheap debt. Whether emerging markets or commodity-rich countries, there’s been no shortage of buyers of US debt.

This has allowed the US—and by extension its consumers—to borrow huge sums of capital to spend on fiscal items or for personal consumption. It was a rather symbiotic relationship from which both parties would benefit, even if longer term prosperity was being jeopardized.


Over the past 30 years, America’s economic growth and boom-bust market cycles have been fueled with abundant sources of cheap debt. Whether emerging markets or commodity-rich countries, there’s been no shortage of buyers of US debt.

This has allowed the US—and by extension its consumers—to borrow huge sums of capital to spend on fiscal items or for personal consumption. It was a rather symbiotic relationship from which both parties would benefit, even if longer term prosperity was being jeopardized.

The China Factor

Between 2000 and 2015, foreign holdings of US securities (the bulk being government bonds) grew at 11% annually—from $3.6 trillion to $17.1 trillion. The transformation and maturity of the Chinese economy was a main driver behind the surge.

During this time, China’s holdings grew at 22% annually—from $92 billion to more than $1.8 trillion.

However, as China’s growth has moderated and its currency continues to depreciate, additional fiscal measures have taken place to meet economic growth targets. Over the past 15 months, China has spent $1 trillion of its $4 trillion foreign currency reserve stockpile, and in turn, has purchased much less US debt.

In fact, Japan has recently overtaken China as America’s top foreign creditor. Combined, the two nations account for more than 37% of America’s foreign debt holdings.

While still significant, both countries’ purchases have been in decline since peaking in 2013, along with several other key central banks around the world that are now more focused on investing domestically.

A Changing Debt Market

In addition to stemming slow economic growth through government spending, China is also attempting to curb excessive leverage in the debt markets.

“Bank wealth products,” made possible by a plethora of cheap credit, are heavily marketed to Chinese investors as an alternative to low-money market rates. The bond holdings of wealth management products more than doubled over the 18-month period ending in June 2016.

But the products are often sold with little disclosure about the securities responsible for producing income to investors. And the People’s Bank of China began tightening lending standards this past August in response to the risks the products pose to its broader economic agenda.

Combined with expectations for more aggressive tightening of monetary conditions in the US, the $9 trillion Chinese bond market has declined precipitously.

The yield on ten-year Chinese government bonds has risen 30% to 3.4 percent, compared with 2.6 percent less than a month ago. Yields go up when bond prices go down, and a higher yield makes it more expensive to issued debt.

A Declining Currency

The Chinese yuan is also sinking along with bond prices and has posted its biggest annual decline in more than 20 years. Goldman Sachs estimates currency is leaving the country to the tune of $70 billion per month, up from a monthly pace of about $50 billion since mid-year.

As the second largest economy and major supplier of capital to the US, these developments and implications for financial markets should not be overlooked.

If the US plans to continue tapping debt markets to ramp up fiscal spending, it may be met with much more challenging conditions.

It’s not a question of if the money will be available, but at what cost?

The Calm Before the Storm?

At 26X current earnings and 17X forward earnings, the S&P 500 is richly valued.

The Dow Jones Industrial Average is up 13% in 2016, oil has gained 25% since the presidential election. Volatility is at a 52-week low.

The gold and bond markets haven’t been so lucky; investors have experienced sharp losses in recent trading. Bears in both markets are out with a vengeance amid a more hawkish Federal Reserve and optimism for reinvigorated economic growth next year. This is driven in part by promises of added fiscal stimulus, deregulation, and rising interest rates. 

So, while all may be calm in US equity markets this holiday season, we recommend taking into consideration the larger forces at play and rigging for stormy waters in 2017.

Gold has declined close to 20% since post-Brexit highs, and yields are surging to levels last seen in 2014. For those not already positioned, this is a smart time to diversify into precious metals or add to an existing allocation.

When volatility heightens in the coming months, you’ll be prepared no matter where the market lands.

Only time will tell if Trump’s economic plan and policies will come to fruition or if investors will be met by disappointment. But the changing debt market could be a key factor affecting the outcome.

Free Ebook: Investing in Precious Metals 101: How to buy and store physical gold and silver

Download Investing in Precious Metals 101 for everything you need to know before buying gold and silver. Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t. It’s the definitive guide for investors new to the precious metals market. Get it now.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules